The RF Earnings Outlook Q3 2015

Published on Jobs, Skills and Pay

The publication last month of the most reliable and comprehensive source on earnings presented a more muted picture of the early stages of the pay recovery than the more timely monthly series had indicated. More encouraging was the information below the headlines, particularly the fact that the recovery was strongest among the lowest earners.

In recent months average weekly earnings growth has started to tail off, and our near-term projection for the December labour market figures suggests real growth of 2.1-2.2%. That’s back to or below the pre-crisis trend, despite inflation remaining ultra-low. This window of opportunity from low inflation has remained open longer than expected, but will start to close in coming months.

In this regular briefing we use 13 key indicators to take a more detailed look at underlying trends and prospects for the future.

  • Our earnings breakdown suggests pay settlements for employees continuously in work have risen over the course of 2015, feeding into relatively steady nominal pay growth. On the other hand, the impact of the changing make-up of the workforce is again dragging slightly and remains a way short the usual boosting effect. Because last year’s compositional drag still forms the base of the calculation this may well improve in coming months. But returning to a sustained boost appears further off than previously expected. More encouragingly, faster wage growth for the lowest earners has led to a reduction in employee earnings inequality in 2015 on both of our measures.
  • Our analysis of pay pressures and slack shows tightening slowing slightly. But these indicators tend to lead nominal wages and had been improving in the main until recently, so we might expect continued upward pressure on pay growth in the coming months. These measures – which include underemployment and labour mobility – are well short of their tightest levels this century, however, reminding us that some spare capacity remains.
  • Our review of longer-term labour market health and efficiency shows flat participation (which will be the key driver of employment growth as unemployment approaches its norm), gently rising productivity, and further deterioration in the training investment and qualification-job matching measures that may help us to understand both the development of productive capacity and the efficiency with which it is put to use. Reflecting on the importance of productivity gains in determining real pay growth in 2016 and beyond as inflation returns to target, our ‘Spotlight’ article highlights the range of pay growth results that realistic productivity and inflation outcomes next year point to.